Module 10 Accounting Policies, Estimates and Errors

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1 IFRS for SMEs (2009) + Q&As IFRS Foundation: Training Material for the IFRS for SMEs Module 10 Accounting Policies, Estimates

2 IFRS Foundation: Training Material for the IFRS for SMEs including the full text of Section 10 Accounting Policies, Estimates of the International Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs) issued by the International Accounting Standards Board on 9 July 2009 with extensive explanations, self-assessment questions and case studies IFRS Foundation 30 Cannon Street London EC4M 6XH United Kingdom Telephone: +44 (0) Fax: +44 (0) Publications Telephone: +44 (0) Publications Fax: +44 (0) Publications Web:

3 This training material has been prepared by IFRS Foundation education staff. It has not been approved by the International Accounting Standards Board (IASB). This training material is designed to assist those training others to implement and consistently apply the IFRS for SMEs. For more information about the IFRS education initiative please visit All rights, including copyright, in the content of this publication are owned by the IFRS Foundation. Copyright 2013 IFRS Foundation 30 Cannon Street London EC4M 6XH United Kingdom Telephone: +44 (0) Web: Disclaimer: The IFRS Foundation, the authors and the publishers do not accept any responsibility for any loss caused to any person and/or entity that acted or refrained from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise. Any names of individuals, companies and/or places used in this publication are fictitious and any resemblance to real people, entities or places is purely coincidental. Right of use Although the IFRS Foundation encourages you to use this training material for educational purposes, you must do so in accordance with the terms of use below. For details on using our standards please visit Please note the use of this training material (as set out in the terms of use) is not subject to the payment of a fee and we reserve the right to change the terms of use from time to time. Your right (if any) to use this training material will expire: when this training material becomes out of date at which time you must cease to use it and/or to make it available; and/or if you breach the terms of use. 1. Terms of Use 1.1 This training material may only be used for educational purposes and in accordance with these terms. If you require any other use, please contact us as you will need a written licence which we may or may not grant. Printed Use. 1.2 Unless you are reproducing the training material in whole or in part to be used in a hard copy stand-alone document, you must not use or reproduce, or allow anyone else to use or reproduce, any trademarks that appear on or in the training material. 1.3 For the avoidance of any doubt, you must not use or reproduce any trademark that appears on or in the training material if you are using all or part of the training material to incorporate into your own documentation. 1.4 The trademarks include, but are not limited to, the IFRS Foundation and IASB names and logos. 1.5 When you copy any extract, in whole or in part, from this publication in print form, you must ensure that: the documentation includes a copyright acknowledgement; the documentation includes a statement that the IFRS Foundation is the source of the material; the documentation includes an appropriate disclaimer; our status as the author(s) of the teaching materials is acknowledged; the extract is shown accurately; and the extract is not used in a misleading context. Electronic Use. 1.6 In relation to any electronic use of this training material: if you intend to provide this training material (in whole) through your website you may only do so by providing a link to our website. Please see for details of how you can link to our website if you intend to include any part of this training material on your website free of charge or in a slide pack for an educational course you must comply with the provisions listed at paragraph 1.5 and you must not use or reproduce, or allow anyone else to use or reproduce, any trademarks that appear on or in the training material if you intend to provide any part of this training material electronically for any other purpose please contact us as you will need a written licence which we may or may not grant If you breach any of these terms of use your right (if any) to use our materials will cease immediately and you must, at our option, return or destroy any copies of the materials you have made. Please address publication and copyright matters to: IFRS Foundation Publications Department 30 Cannon Street London EC4M 6XH United Kingdom Telephone: +44 (0) Web: Trade Marks The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the Hexagon Device, IFRS Foundation, eifrs, IAS, IASB, IASC Foundation, IASCF, IFRS for SMEs, IASs, IFRS, IFRSs, International Accounting Standards and International Financial Reporting Standards are Trade Marks of the IFRS Foundation.

4 Contents INTRODUCTION 1 Learning objectives 1 IFRS for SMEs 2 Introduction to the requirements 2 REQUIREMENTS AND EXAMPLES 4 Scope of this Section 4 Selection and application of accounting policies 4 Consistency of accounting policies 8 Changes in accounting policies 9 Changes in accounting estimates 18 Corrections of prior period errors 22 SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS 7 COMPARISON WITH FULL IFRSs 30 TEST YOUR KNOWLEDGE 31 APPLY YOUR KNOWLEDGE 36 Case study 1 36 Answer to case study 1 37 Case study 2 38 Answer to case study 2 39 IFRS Foundation: Training Material for the IFRS for SMEs (version ) iv

5 and Errors This training material has been prepared by IFRS Foundation education staff and has not been approved by the International Accounting Standards Board (IASB). The accounting requirements applicable to small and medium-sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July INTRODUCTION This module, updated in January 2013, focuses on the accounting and reporting of accounting policies, estimates and errors in accordance with Section 10 Accounting Policies, Estimates and Errors of the IFRS for SMEs that was issued in July 2009 and the related non-mandatory guidance subsequently provided by the IFRS Foundation SME Implementation Group.. It introduces the learner to the subject, guides the learner through the official text, develops the learner s understanding of the requirements through the use of examples and indicates significant judgements that are required in applying Section 10. Furthermore, the module includes questions designed to test the learner s knowledge of the requirements and case studies to develop the learner s ability to account for changes in accounting policies, changes in accounting estimates and the correction of prior period errors in accordance with the IFRS for SMEs. Learning objectives Upon successful completion of this module you should know the financial reporting requirements for accounting policies, estimates and errors in accordance with the IFRS for SMEs as issued in July Furthermore, through the completion of case studies that simulate aspects of the real world application of that knowledge, you should have enhanced your ability to account for accounting policies, estimates and errors in accordance with the IFRS for SMEs. In particular you should, in the context of the IFRS for SMEs, be able: to distinguish between the following: a change in accounting estimate, the correction of a prior period error and a change in accounting policy to develop an accounting policy for a transaction, other event or condition not specifically addressed in the IFRS for SMEs to disclose accounting policies and account for and disclose a change in accounting policy in financial statements (including demonstrating an understanding of the adjustments required under retrospective application and prospective application of an accounting policy) to account for and disclose a change in accounting estimate in financial statements to account for and disclose the correction of a prior period error in financial statements to demonstrate an understanding of the significant judgements that are required in making estimates and in determining and applying accounting policies. IFRS Foundation: Training Material for the IFRS for SMEs (version ) 1

6 IFRS for SMEs The IFRS for SMEs is intended to apply to the general purpose financial statements of entities that do not have public accountability (see Section 1 Small and Medium-sized Entities). The IFRS for SMEs includes mandatory requirements and other material (non-mandatory) that is published with it. The material that is not mandatory includes: a preface, which provides a general introduction to the IFRS for SMEs and explains its purpose, structure and authority. implementation guidance that includes illustrative financial statements and a disclosure checklist. the Basis for Conclusions, which summarises the IASB s main considerations in reaching its conclusions in the IFRS for SMEs. the dissenting opinion of an IASB member who did not agree with the publication of the IFRS for SMEs. In the IFRS for SMEs the Glossary is part of the mandatory requirements. In the IFRS for SMEs there are appendices in Section 21 Provisions and Contingencies, Section 22 Liabilities and Equity and Section 23 Revenue. Those appendices are non-mandatory guidance. Further, the SME Implementation Group (SMEIG), responsible for assisting the IASB on matters related to the implementation of the IFRS for SMEs, published implementation guidance in the form of questions and answers (Q&As). The Q&As are intended to provide non-mandatory and timely guidance on specific accounting questions that are being raised with the SMEIG by users implementing the IFRS for SMEs. When the IFRS for SMEs was issued in July 2009, the IASB undertook to assess entities experience of applying the IFRS for SMEs following the first two years of application and consider whether there is a need for any amendments. To this end, in June 2012, the IASB issued a Request for Information: Comprehensive Review of the IFRS for SMEs. Currently it is expected that an exposure draft proposing amendments to the IFRS for SMEs will be issued in the first half of Introduction to the requirements The objective of general purpose financial statements of a small or medium-sized entity is to provide information about the entity s financial position, performance and cash flows that is useful for economic decision-making by a broad range of users (eg owners who are not involved in managing the business, potential owners, existing and potential lenders and other creditors) who are not in a position to demand reports tailored to meet their particular information needs. The objective of Section 10 is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of prior period errors. Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. IFRS Foundation: Training Material for the IFRS for SMEs (version ) 2

7 Once an entity has adopted an accounting policy for a specific type of transaction, other event or condition, it should change that policy only if the IFRS for SMEs is amended or the entity concludes that a new policy results in reliable and more relevant information. Except in circumstances specified in the IFRS for SMEs, all changes in accounting policies and corrections of prior period errors are accounted for retrospectively. This means that comparative information in financial statements is restated to reflect transactions and events in accordance with the new accounting policy as if that policy had always been applied, and that prior period errors are corrected in the period in which they occurred. Retrospective application of accounting policies and retrospective restatement of prior period errors enhances the relevance and reliability of an entity s financial statements by making them comparable over time and with the financial statements of other entities. Prior period errors are omissions from, and misstatements in, the entity s financial statements for one or more prior periods. They arise from a failure to use reliable information that was available when financial statements for those periods were authorised for issue, provided that such information could reasonably be expected to have been obtained and used in the preparation and presentation of those financial statements. They also arise from the misuse of such information. A change in accounting estimate is an adjustment that results from assessing the present status of, and expected future benefits and obligations associated with, assets and liabilities. The adjustment may be to the carrying amount of an asset or a liability, or the expense that reflects the consumption of the asset. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors. Changes in accounting estimates are, except in clearly defined circumstances, applied prospectively. This means that the effect of a change is included in profit or loss in the period of the change, if the change affects that period only, and in the period of the change and future periods if the change affects both. Disclosure requirements for accounting policies and information about key sources of estimation uncertainty are set out in Section 8 Notes to the Financial Statements (see paragraphs ). Disclosure requirements for changes in accounting policies are set out in Section 10. IFRS Foundation: Training Material for the IFRS for SMEs (version ) 3

8 REQUIREMENTS AND EXAMPLES The contents of Section 10 Accounting Policies, Estimates of the IFRS for SMEs are set out below and shaded grey. Terms defined in the Glossary of the IFRS for SMEs are also part of the requirements. They are in bold type the first time they appear in the text of Section 10. The notes and examples inserted by the IFRS Foundation education staff are not shaded. Other annotations inserted by the IFRS Foundation staff are presented within square brackets in bold italics. The insertions made by the staff do not form part of the IFRS for SMEs and have not been approved by the IASB. Scope of this section 10.1 This section provides guidance for selecting and applying the accounting policies used in preparing financial statements. It also covers changes in accounting estimates and corrections of errors in prior period financial statements. Selection and application of accounting policies 10.2 Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements If this IFRS specifically addresses a transaction, other event or condition, an entity shall apply this IFRS. However, the entity need not follow a requirement in this IFRS if the effect of doing so would not be material. Notes Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of users made on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances. The size or nature of the item, or a combination of both, is the determining factor (see paragraph 3.16). Users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence (see paragraph 2.4). The providers of risk capital (an important user group) are concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information that enables them to assess the entity s ability to pay dividends. Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions of such users made on the basis of the financial statements (see paragraph 2.6). The definition of material implies that an entity need not provide a specific disclosure IFRS Foundation: Training Material for the IFRS for SMEs (version ) 4

9 required by this IFRS if the information is not material. Moreover, an entity need not apply its accounting policies when the effect of not applying them is immaterial. Examples IFRS for SMEs addresses a transaction, event or condition Ex 1 Contrary to the requirements of Section 20 Leases, a manufacturing entity does not capitalise finance leases that it enters into as a lessee. The entity accounts for all leases (ie operating leases and finance leases) in accordance with the requirements of paragraphs and (ie the requirements for operating leases). The only finance lease that the entity has ever entered into is for the use of a photocopying machine with a fair value of CU1,000 (1) at the inception of the lease (in 20X8 the current reporting period). At the end of the current reporting period, the carrying amount of the entity s property, plant and equipment exceeds CU90,000,000 and its liabilities exceed CU40,000,000. For the year ended 31 December 20X8, the entity reported profit of CU30,000,000. The effect of not capitalising the finance lease is probably not material it is highly unlikely that an error of this magnitude could influence the economic decisions of users made on the basis of the financial statements. Whilst the effect of the entity s accounting policy for finance leases is not material, the entity need not capitalise the finance lease. Ex 2 Contrary to the requirements of Section 20 Leases an executive jet operator does not capitalise finance leases that it enters into as a lessee. The entity sole business is operating two executive jet airplanes, both of which it leases under a finance lease. The entity accounts for all leases (ie operating leases and finance leases) in accordance with the requirements of paragraphs and (ie the requirements for operating leases). The effect of not capitalising finance leases could influence the economic decisions of users made on the basis of the financial statements. Therefore, the entity must adopt an accounting policy of capitalising finance leases in accordance with the requirements of Section 20. Ex 3 The facts are the same as in example 1. However, in this example, the entity also enters into many other individually immaterial finance leases. The effect of not capitalising finance leases must be assessed on a collective basis if when considered collectively, they could influence the economic decisions of users made on the basis of the financial statements, then the effect is material and the entity must adopt an accounting policy of capitalising finance leases in accordance with the requirements of Section 20. However, if it is highly unlikely that the collective effect of not capitalising the finance leases could influence the economic decisions of users made on the basis of the financial statements, then the entity need not follow an accounting policy of capitalising finance lease. (1) In this example, and in all other examples in this module, monetary amounts are denominated in currency units (CU). IFRS Foundation: Training Material for the IFRS for SMEs (version ) 5

10 Ex 4 To lease an item of factory equipment, a lessee used the services of an agency to find a suitable lessor. The lease is a finance lease. The IFRS for SMEs does not specifically mention agency fees on leases. However, it does discuss initial direct costs that the lessee incurs. The entity s home country, which has a conceptual framework that it regards as similar to the IASB s, requires such agency fees to be recognised as an expense immediately. May the entity look to its national accounting standard in developing its accounting policy? No. The agency fees are a type of initial direct costs of the lessee (incremental costs that are directly attributable to negotiating and arranging a lease). Paragraph 20.9 requires any initial direct costs to be added to the amount recognised as an asset. Unless the effect of following the entity's national standard is immaterial, it conflicts with the requirements of paragraph If this IFRS does not specifically address a transaction, other event or condition, an entity s management shall use its judgement in developing and applying an accounting policy that results in information that is: (a) relevant to the economic decision-making needs of users, [Refer: paragraph 2.5] and (b) reliable [Refer: paragraph 2.7], in that the financial statements: (i) represent faithfully the financial position, financial performance and cash flows of the entity; (ii) reflect the economic substance of transactions, other events and conditions, and not merely the legal form; [Refer: paragraph 2.8] (iii) are neutral, ie free from bias; (iv) are prudent; [Refer: paragraph 2.9] and (v) are complete [Refer: paragraph 2.10] in all material [Refer: paragraph 2.3] respects In making the judgement described in paragraph 10.4, management shall refer to, and consider the applicability of, the following sources in descending order: (a) the requirements and guidance in this IFRS dealing with similar and related issues, and (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2 Concepts and Pervasive Principles In making the judgement described in paragraph 10.4, management may also consider the requirements and guidance in full IFRSs dealing with similar and related issues. IFRS Foundation: Training Material for the IFRS for SMEs (version ) 6

11 Notes (2) When the IFRS for SMEs does not specifically address a transaction, other event or condition, an entity must select an accounting policy that results in relevant and reliable information. In making that judgement, an entity considers, first, the requirements and guidance in the IFRS for SMEs dealing with similar and related issues and, second, the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2 Concepts and Pervasive Principles. If that does not provide guidance, the entity may look to the requirements and guidance in full IFRSs, including Interpretations of IFRSs, dealing with similar and related issues (Refer: Basis for Conclusions paragraph BC86). (2) SME Implementation Group (SMEIG) April 2012: Jurisdiction requires fallback to full IFRSs Issue A jurisdiction permits all entities meeting the definition of an SME to follow the IFRS for SMEs. However the jurisdiction adds a requirement that, where the recognition and measurement requirements for a particular transaction, other event or condition are not specifically covered by the IFRS for SMEs, but are covered in full IFRSs, an SME must follow the recognition and measurement requirements in full IFRSs for that transaction, event or condition. May SMEs in that jurisdiction state compliance with the IFRS for SMEs? Response Whether an SME can assert compliance with the IFRS for SMEs in such a case will depend on management s assessment of relevance and reliability as required by paragraph 10.4 of Section 10 Accounting Policies, Estimates. In the absence of specific requirements in the IFRS for SMEs, paragraph 10.4 requires management to use its judgement in developing an accounting policy that is reliable and results in information that is relevant to the economic decision-making needs of users. Paragraph 10.5 establishes the following hierarchy for an entity to follow in deciding on the appropriate accounting policy: (a) the requirements and guidance in the IFRS for SMEs dealing with similar and related issues; and (b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in Section 2 Concepts and Pervasive Principles. Paragraph 10.6 notes that, in making the judgement described in paragraph 10.4, management may also consider the requirements and guidance in full IFRSs that deal with similar and related issues. Taken together, paragraphs 10.4 to 10.6 allow the full IFRS principles to be used in the absence of specific guidance in the IFRS for SMEs, provided that they do not conflict with requirements in the hierarchy in paragraph This scenario is different from allowing a free choice to follow full IFRS requirements when specific requirements exist in the IFRS for SMEs for a transaction, other event or condition. Where there are such specific requirements in the IFRS for SMEs, they must be applied even if they differ from full IFRSs. If the entity follows a requirement in full IFRSs for that transaction, other event or condition for which the IFRS for SMEs contains different guidance, it will not be able to state compliance with the IFRS for SMEs unless the effect is not material. (See Q&A 2012/02 at IFRS Foundation: Training Material for the IFRS for SMEs (version ) 7

12 Example developing an accounting policy Ex 5 On 1 January 20X7, as part of a scheme to provide support for projects to help rural communities, a non-government development agency announced a plan whereby during 20X7 20X9 entities can apply for a grant to set up farming operations in a specified rural area. Qualifying entities will receive an upfront cash payment of CU50,000 to set up farming operations in the specified area. Entities must complete an application form, submit their proposal and provide specified documents which the development agency will consider before issuing the grant. The IFRS for SMEs does not specify how to account for a grant from a non-government development agency. However, it does specify how to account for government grants (see Section 24 Government Grants). By analogy, grants received from non-government development agencies should be accounted for in accordance with the requirements of Section 24 (ie the entity should determine its accounting policy for grants from non-government development agencies in accordance with the requirements of Section 24). Consistency of accounting policies 10.7 An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless this IFRS specifically requires or permits categorisation of items for which different policies may be appropriate. If this IFRS requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category. Examples consistency of accounting policies Ex 6 An entity s accounting policy is to measure investments in jointly controlled entities using the fair value model. However, it is unable to determine the fair value of its investment in one of its jointly controlled entities (JV B). Therefore it measures its investment in JV B using the cost model. The entity s accounting policy is acceptable. Section 15 Investments in Joint Ventures requires an entity to account for all of its investments in jointly controlled entities using one of the following: (i) the cost model in paragraph 15.10; (ii) the equity method in paragraph 15.13; or (iii) the fair value model in paragraph An entity that opts to use the fair value model must measure all of its investments in jointly controlled entities after initial recognition at fair value. However, the entity should use the cost model for any investment in a jointly controlled entity for which it is impracticable to measure fair value reliably without undue cost or effort (see paragraph 15.15). Ex 7 An entity s accounting policy is to measure investments in associates using the fair value model. However, it is unable to determine the fair value of its investment in one of its associates (associate B). Therefore, it measures its investment in associate B using the cost model. The entity s accounting policy is acceptable. Section 14 Investments in Associates requires an entity to account for all of its investments in associates using one of the following: (i) the cost model in paragraph 14.5; (ii) the equity method in paragraph 14.8; or (iii) the IFRS Foundation: Training Material for the IFRS for SMEs (version ) 8

13 fair value model in paragraph An entity that opts to use the fair value model must measure all of its investments in associates after initial recognition at fair value. However, the entity should use the cost model for any investment in an associate for which it is impracticable to measure fair value reliably without undue cost or effort (see paragraph 14.10). Ex 8 An entity s accounting policy is to measure investments in associates using the cost model. However, because the equity instruments of one of its associates (associate C) are listed on the national securities exchange, it measures its investment in associate C using the fair value model. Therefore it measures its investment in associate B using the cost model. The entity s accounting policy is acceptable. Section 14 Investments in Associates requires an entity to account for all of its investments in associates using one of the following: (i) the cost model in paragraph 14.5; (ii) the equity method in paragraph 14.8; or (iii) the fair value model in paragraph An entity that opts to use the cost model must measure all of its investments in associates after initial recognition at cost less any accumulated impairment losses (see paragraph 14.5). However, the entity must use the fair value model for its investment in an associate for which there is a published price quotation (see paragraph 14.7). Ex 9 An entity s accounting policy is to measure its investments in associates using the fair value model. The entity follows an accounting policy of measuring its investments in jointly controlled entities using the cost model. None of the entity s investments are traded in a public securities market. The entity s accounting policies are acceptable. Its accounting policy for investments in associates need not be the same as its accounting policy for investments in jointly controlled entities. Changes in accounting policies 10.8 An entity shall change an accounting policy only if the change: (a) is required by changes to this IFRS, or (b) results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity s financial position, financial performance or cash flows. Examples change in accounting policies Ex 10 An entity that measures its investments in associates after initial recognition using the cost model changes its accounting policy to adopt the fair value model because its management believes that measurement at fair value provides more relevant information. The entity s change in accounting policy is acceptable. Using the fair value model to measure investments in associates results in the financial statements providing reliable and more relevant information about the effects of its investments in associates on the entity s financial position, financial performance or cash flows. IFRS Foundation: Training Material for the IFRS for SMEs (version ) 9

14 Ex 11 An entity changes from presenting a classified statement of financial position (current and non-current assets and current and non-current liabilities shown as separate classifications) to a liquidity presentation (items presented in order of liquidity without current/non-current classification) because, in the entity s particular circumstances, a liquidity presentation provides information that is reliable and more relevant (see paragraph 4.4). The entity restated its statement of financial position for the comparable prior period because it regarded the change to a liquidity presentation as a change in accounting policy. The entity s treatment is correct. Accounting policies include not only the principles for recognising and measuring assets, liabilities, income and expenses but also the principles and practices for presenting them in financial statements. Current/noncurrent versus liquidity presentation is an example. Retrospective restatement is required The following are not changes in accounting policies: (a) the application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring. (b) the application of a new accounting policy for transactions, other events or conditions that did not occur previously or were not material. (c) a change to the cost model when a reliable measure of fair value is no longer available (or vice versa) for an asset that this IFRS would otherwise require or permit to be measured at fair value. Examples not a change in accounting policy Ex 12 An entity acquired an investment in an associate in the current reporting period and adopted the cost model to measure the investment in associate after initial recognition. It had never before held an investment in an associate. The adoption of the cost model to measure its first investment in an associate does not constitute a change in accounting policy. The accounting policy is for a transaction in which the entity had not previously engaged. Ex 13 An entity acquired an investment in an associate in the current reporting period and adopted the fair value model to measure its investment in associate after initial recognition. Before this investment the entity accounted for its sole other investment in an associate as an item of inventory. Management justified the treatment of its investment in this associate as inventory because its cost (and value) was immaterial to the entity s financial statements. Provided that the original investment in associate was immaterial to the entity s financial statements, the use of the fair value model for the measurement of all of its investments in associates is not a change in accounting policy. The accounting policy is for a transaction that was previously not material. Refer also to paragraph Ex 14 In the current reporting period, when a reliable measure of the fair value of an entity s only investment property became available, the entity transferred its sole investment property from property, plant and equipment (where it was accounted IFRS Foundation: Training Material for the IFRS for SMEs (version ) 10

15 for using the cost-depreciation-impairment model) to investment property measured using the fair value model. The transfer of the investment property from property, plant and equipment (using the cost-depreciation-impairment model) to investment property measured using the fair value model, is a change in circumstances. It is not a change in accounting policy (see paragraph 16.8 of Section 16 Investment Property). Ex 15 In the current reporting period, when an entity began redeveloping its previously owner-occupied building to rent out to tenants under operating leases, it transferred the property from property, plant and equipment (where it was accounted for using the cost-depreciation-impairment model) to investment property measured using the fair value model. The transfer of the property from property, plant and equipment (using the cost-depreciation-impairment model) to investment property measured using the fair value model, is a change in use of the property. It is not a change in accounting policy. Ex 16 An entity whose functional currency became hyperinflationary in the current reporting period applied Section 31 Hyperinflation in preparing and presenting its financial statements, for the first time, in the current reporting period. The application of Section 31, for the first time, in preparing and presenting the financial statements is not a change in accounting policy; it is a change in the entity s circumstances. The new accounting policy is for a condition that did not occur previously. Note, although the application of Section 31 for the first time is not a change in accounting policy, the restatement process required by Section 31 (paragraphs 31.3 and 31.4) is similar to the process required for retrospective application of a change in accounting policy If this IFRS allows a choice of accounting treatment (including the measurement basis) for a specified transaction or other event or condition and an entity changes its previous choice, that is a change in accounting policy. Notes An entity can change its accounting policy voluntarily only if the change results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity s financial position, financial performance or cash flows (see paragraph 10.8(b)). IFRS Foundation: Training Material for the IFRS for SMEs (version ) 11

16 Applying changes in accounting policies An entity shall account for changes in accounting policy as follows: (a) an entity shall account for a change in accounting policy resulting from a change in the requirements of this IFRS in accordance with the transitional provisions, if any, specified in that amendment; (b) when an entity has elected to follow IAS 39 Financial Instruments: Recognition and Measurement instead of following Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues as permitted by paragraph 11.2, and the requirements of IAS 39 change, the entity shall account for that change in accounting policy in accordance with the transitional provisions, if any, specified in the revised IAS 39; and (c) an entity shall account for all other changes in accounting policy retrospectively (see paragraph 10.12). Examples applying changes in accounting policies Ex 17 In the current reporting period the entity was required to comply with an amendment to the IFRS for SMEs. The transitional provisions in the amended IFRS for SMEs required the change in accounting policy to be accounted for as an adjustment to retained earnings at the beginning of the current reporting period. The entity calculated that CU80,000 of the CU100,000 decrease in retained earnings at the beginning of the current reporting period, resulting from the change in accounting policy, is attributable to years before the comparative reporting period. Paragraph 10.11(a) (c) does not provide free choices but rather a sequential hierarchy of how to account for changes in accounting policy. Paragraph 10.11(a) requires the entity to follow the transitional provisions of the amended IFRS for SMEs (ie the effect of the change in accounting policy is presented as a restatement of retained earnings at the beginning of the current reporting period a decrease of CU100,000 and the comparative figures are not be restated). Ex 18 In compliance with the only option in the IFRS for SMEs to use full IFRSs, an entity applies the requirements of IAS 39 Financial Instruments: Recognition and Measurement. In the current reporting period IAS 39 was amended. The transitional provisions for the amendment required the change in accounting policy to be accounted for as an adjustment to retained earnings at the beginning of the current reporting period. The entity calculated that CU80,000 of the CU100,000 decrease in retained earnings at the beginning of the current reporting period, as a result of the change in accounting policy, is attributable to years before the comparative reporting period. The effect of the change in accounting policy must be presented as a restatement of retained earnings at the beginning of the current reporting period a decrease of CU100,000. In accordance with the transitional provisions specified in the amendment to IAS 39 the comparative figures must not be restated. Ex 19 In the current reporting period an entity voluntarily changed an accounting policy. The cumulative effect of the change in accounting policy on the retained earnings of the entity was a decrease of CU100,000 at the beginning of the current reporting IFRS Foundation: Training Material for the IFRS for SMEs (version ) 12

17 period, CU80,000 of which was attributable to years before the comparative reporting period. In accordance with paragraph 10.11(c) the effect of the change in accounting policy must be presented as a restatement of retained earnings at the beginning of the comparative reporting period (a decrease of CU80,000) and CU20,000 decrease in the profit for the comparative period. The cumulative effect of these restatements is a decrease of CU100,000 in retained earnings at the beginning of the current reporting period. Retrospective application When a change in accounting policy is applied retrospectively in accordance with paragraph 10.11, the entity shall apply the new accounting policy to comparative information for prior periods to the earliest date for which it is practicable, as if the new accounting policy had always been applied. When it is impracticable to determine the individual-period effects of a change in accounting policy on comparative information for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period. Notes It is impracticable to apply a requirement if the entity cannot apply it after making every reasonable effort to do so. Impracticable is a high hurdle. For a particular prior period, it is impracticable to apply a change in an accounting policy retrospectively if: (a) the effects of the retrospective application are not determinable; (b) the retrospective application requires assumptions about what management s intention would have been in that period; or (c) the retrospective application requires significant estimates of amounts and it is impossible to distinguish objectively information about those estimates that: (i) provides evidence of circumstances that existed on the date(s) as at which those amounts are to be recognised, measured or disclosed; and (ii) would have been available when the financial statements for that prior period were authorised for issue from other information. IFRS Foundation: Training Material for the IFRS for SMEs (version ) 13

18 Examples retrospective application Ex 20 In 20X7, the entity voluntarily changed an accounting policy. In accordance with paragraph 10.11(c) the entity must account for the change in accounting policy retrospectively. The cumulative effect of the change in accounting policy is a decrease of CU100,000 in retained earnings at 1 January 20X7 the beginning of the current reporting period. The entity presents two years of comparative information and has calculated that the effect of the change in accounting policy is CU25,000 less profit for each of the past four years. The effect of the change in accounting policy must be presented as a restatement of: retained earnings at 1 January 20X5 reduced by CU50,000; profit for the year ended 31 December 20X5 reduced by CU25,000; and profit for the year ended 31 December 20X6 reduced by CU25,000. The cumulative effect of these restatements is a CU100,000 downward restatement of retained earnings at 1 January 20X7 (the beginning of the current reporting period). Ex 21 The facts are the same as in example 20. However, in this example, because retrospective application requires significant estimates of amounts and it is not possible to distinguish objectively information about those estimates, it is impracticable for the entity to determine the individual period effects of the change in accounting policy on the prior periods presented. The effect of the change in accounting policy must be presented as a CU100,000 downward restatement of retained earnings at 1 January 20X7 (the beginning of the current reporting period). The entity would disclose the information required in paragraph 10.14(d). Ex 22 The facts are the same as in example 21. However, in this example, assume that it is impracticable for the entity to determine the individual period effects of the change in accounting policy on the periods before 20X6. The effect of the change in accounting policy must be presented as a restatement of retained earnings at 1 January 20X6 reduced by CU75,000 and profit for the year ended 31 December 20X6 reduced by CU25,000. The cumulative effect of these restatements is a CU100,000 downward restatement of retained earnings at 1 January 20X7 (the beginning of the current reporting period). The entity does not restate the (comparative) information presented for the year ended 31 December 20X5 because it is impracticable to do so. Ex 23 The facts are the same as in example 21. However, in this example, assume that the entity would be required to engage an outside valuer to determine the individual period effects of the change in accounting policy on the prior periods presented. The entity decides that, because of the cost that would be involved in engaging the outside valuer, it is impracticable to determine the individual period effects of changing an accounting policy for one or more prior periods presented. Therefore it adjusts the opening balance of retained earnings of the period in which the accounting policy is changed for the entire cumulative effect of the change in accounting policy. IFRS Foundation: Training Material for the IFRS for SMEs (version ) 14

19 The cost of engaging an outside valuer does not make restatement of prior periods impracticable (as that term is defined in the IFRS for SMEs). The prior periods must be restated. Disclosure of a change in accounting policy [Refer also: paragraph 8.5] When an amendment to this IFRS has an effect on the current period or any prior period, or might have an effect on future periods, an entity shall disclose the following: (a) the nature of the change in accounting policy. (b) for the current period and each prior period presented, to the extent practicable, the amount of the adjustment for each financial statement line item affected. (c) the amount of the adjustment relating to periods before those presented, to the extent practicable. (d) an explanation if it is impracticable to determine the amounts to be disclosed in (b) or (c) above. Financial statements of subsequent periods need not repeat these disclosures. Example disclosure of a change in accounting policy Ex 24 In 20X2, the entity was required to comply with an amendment to the IFRS for SMEs. The cumulative effect of the change in accounting policy on the retained earnings of the entity at the beginning of 20X1 is a CU80,000 decrease. The effect on profit before tax for 20X1 is a CU25,000 decrease, with a resultant decrease in income tax expense of CU5,000. Extract from SME A statement of income and retained earnings for the year ended 31 December 20X2 Notes 20X2 20X1 Restated CU CU Profit before tax (20X1: previously stated CU185,000) 200, ,000 Income tax expense (20X1: previously stated CU45,000) (50,000) (40,000) Profit for the year (20X1: previously stated CU140,000) 150, ,000 Retained earnings at the beginning of the year 320, ,000 - as previously stated 420, ,000 - effect of the change in accounting policy 12 (100,000) (80,000) Retained earnings at the end of the year 470, ,000 IFRS Foundation: Training Material for the IFRS for SMEs (version ) 15

20 SME A Notes to the financial statements for the year ended 31 December 20X2 Note 12 Change in accounting policy In 20X2 in accordance with an amendment to Section X of the IFRS for SMEs the entity changed its accounting policy for. Previously, the entity had. The entity now. This change in accounting policy has been accounted for retrospectively, and the comparative information for 20X1 has been restated. The effect of the change is a reduction of CU20,000 in profit for the year ended 31 December 20X1. Furthermore, opening retained earnings for 20X1 have been reduced by CU80,000, which is the amount of the adjustment relating to periods before 20X1. Note: The effect of the restatement on the statement of financial position (and other statements) must also be presented When a voluntary change in accounting policy has an effect on the current period or any prior period, an entity shall disclose the following: (a) the nature of the change in accounting policy. (b) the reasons why applying the new accounting policy provides reliable and more relevant information. (c) to the extent practicable, the amount of the adjustment for each financial statement line item affected, shown separately: (i) for the current period; (ii) for each prior period presented; and (iii) in the aggregate for periods before those presented. (d) an explanation if it is impracticable to determine the amounts to be disclosed in (c) above. Financial statements of subsequent periods need not repeat these disclosures. Example voluntary change in accounting policy Ex 25 In 20X2, the entity voluntarily changed its accounting policy for... from to. The cumulative effect of the change in accounting policy on the retained earnings of the entity at the beginning of 20X1 is a CU80,000 decrease. The effect on profit before tax for the 20X1 is a CU25,000 decrease, with a resultant decrease in income tax expense of CU5,000. IFRS Foundation: Training Material for the IFRS for SMEs (version ) 16

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